Deciphering The Case-Shiller Index For San Francisco Real Estate Market

Because I couldn’t possibly say it better myself, or make such nice graphs, or pore over the data, I present Paragon Real Estate’s argument against the oh-so revered Case-Shiller Index (I personally can’t stand the index, but I love Paragon and their agents for doing the work for us.)

Word for word copy:
June 2011

The news media regularly reports that the S&P Case-Shiller Home Price Index has indicated large and continuing price declines in San Francisco, not only since the market meltdown in late 2008, but since the period commencing thereafter in early-mid 2009. This is based upon the C-S analysis of home sales in the 5-county San Francisco Metropolitan Statistical Area (MSA), comprising SF, Marin, Contra Costa, Alameda and San Mateo counties. The statistics (and price declines) quoted by the media are almost always for the overall SF MSA price trend.

Unfortunately, the Case-Shiller overall Index is the wrong Case-Shiller Index to use when assessing market trends in the city and county of San Francisco itself (as opposed to the 5-county San Francisco MSA):

· First of all, it should be noted that the C-S Index measures price trends for houses only (single family dwellings or SFDs) — condos, co-ops, TICs and multi-unit buildings are not included.

· Secondly, Case-Shiller tracks not only overall house price trends, but house price trends broken into 3 price tiers: low, middle and high.

· The “upper tier” price range is defined as those homes selling for over $601,000. In the city of San Francisco, over the past 17 months, 67% of all our house (SFD) sales were over $601,000. If we exclude the two least affluent, southern Realtor districts running from Bayview to Oceanview (hit hardest by foreclosures and distress sales), and look only at the 8 central and northern Realtor districts, then 89% of our house sales were over $601,000 and thus in the “high tier.” (Just for the record, the majority of our condo sales is also above $601,000.)

· The 5-county, SF Metro Area SFD housing stock — in all price tiers — in year 2000 was approximately 948,000 SFD units. The city of San Francisco contains about 114,000 SFD units — or only 12% of the metro area total. Thus the overall Index is heavily skewed toward the markets of the other 4 counties. However, the city’s percentage of total metro area SFD units in the high price tier would be significantly greater.

It’s obvious that the Case-Shiller High-Tier Price Index for the San Francisco MSA
is the one most applicable to the real estate market of the city and county of San Francisco.

Which brings us to the chart below:
Looking at the chart of C-S Index “high tier” price points in January of each year since the year 2000, we see the massive appreciation from year 2000 to peak values in 2006 – 2008 (different neighborhoods of the Bay Area and the city peaked at different times within that time period); then an 18% – 22% decline to early 2009, with the September 2008 market meltdown occurring in between. That seems correct as an overall average for the price adjustment that generally occurred in San Francisco’s 8 central and northern districts. (The 2 southern districts, dominated by sales in the lower price tiers and hard hit by distress sales, saw declines typically running from 25% to 40%.)

Post market meltdown, since January 2009 to March 2011 (the latest C-S data published), over a period of 26 months, the C-S Index for “high tier” priced homes shows a further 1.8% decline in value. Even if one refuses to consider a reasonable margin of error in the C-S calculation, a price adjustment of less than 2% comes pretty close to what we’ve concluded for quite some time, i.e. generally speaking, San Francisco has experienced a basically stable home price situation in the city over the past 2 years, especially in our 8 more affluent districts where the median house sales price is typically above $850,000.

Indeed, though not shown on the chart, the Case-Shiller Index recorded a small uptick in high tier home values in March 2011 for the San Francisco Metro Area. And based upon what we’re seeing in the city market, both statistically and in the hurly burly of deal-making — i.e. a significant tightening in the supply and demand dynamic within SF — we believe there is a good chance the Index will indicate further upticks in high tier home prices in April and May.

Brett,
No, I’m not saying this because I’m a Realtor. If you’ve looked at some of my past posts, I’m probably the most honest agent in the city…no joke. I’ll tell you straight up what I think. Regarding the major tech companies, most are already South Bay, but many still want to live here as those employees are so young…as you can attest to judging by your email address. ;-) I plan on upping my presence in Palo Alto and those areas very soon, because I do see big demand on the horizon in those areas. Happy to talk to any of your colleagues about the “real” real estate market anytime.

Bluntly, this says almost nothing. Further – each time I hear “The past does not matter – we are living in a new time.” it turns into bull manure. Palo Alto is a prime example. I used to live (rent) in one of the Echlers in PA – the value of the home went from ~500 k to 1M+ in less than 18 months – 1998-1999. Oh and the house was literally falling down due to dry rot and had a huge leak in the roof. We watched relators sit in open houses smoking – treating potential buyers like dirt.

Have you not noticed that the local cattle (employees) are not getting the large stock options of yore? This means that the money is no longer in the system to support the still over heated prices in the Bay area. Guess what – the housing prices in the Bay area – including PA are going to collapse. Case Schiller is just one indicator that this is happening and will continue to happen.

Interesting article…. I guess my takeaway is that the chart still shows a value of 144 for the index. The historical average with effects of inflation removed is 100. This indicates the high price listings in SF area actually have 40% more to drop??? I’m not saying prices will actually drop nearly that much but it may mean flat to slightly down prices for some time while inflation catches up. I live in SF area (Sonoma County) and I think we’ve already gotten much closer to the historical average value of 100. At least I can find a lot of houses selling for prices near their price in 2000 when the index was at 100. I’d love to see a similar chart for my specific area.

misha – I would somehow disagree on noe picking up – altho I have not given an accurate statistic eye to the june numbers.
The problem of noe is that there is a world apart from one end to another end of the market. (same goes for many ‘hood in the city – I’ll just pick the one I know best for the example).

So to follow the market, I split the market in four easy submarkets.
– bulldozer house
– historic (80+) house “move-in” no remodeling (that is no foundation work, no new systems)
– historic house move-in remodeled (new foundations, new systems – might be contractor new or lived in a few years)
– all new

“All new” cannot and will not be an apple to apple ever, due to the inconsistency year to year of the stock (size, location, branding, style etc). The google house for example. or the fire station. Those houses need to be pooled with similar all new houses in similar districts (PHts, cole, castro, clarendon etc).

second group has been historically in the 1.0 to 1.4 range. and is still VERY low compared to past high average of 1.3 (currently in the 1.1?).
third group has been historically in the 1.5-2.6 range. and is still VERY low compared to a past average of 1.8 (currently in the 1.5?)
first group has been sinking endlessly since the infamous Alvarado 1.1 pile of wood court sale. There are current offering barely above half a million – maybe a good 25% drop from the 2005 average for the average bulldozer house.

What we do see tho is that there are barely no more bulldozer houses, and even the second group has been shrinking since many of the second group houses got a facelift thru sales, development investors or lines of equity and are now in group three. Those upgrades will NEVER be undone and there are no earthquakes/fires/floods/landslide to provide new stock.

Group 1 is doomed … as there are less and less houses is disrepair … filling up the pool of group 4 and some to group 1 and group 2.
And group 2 is getting a consistent shredding in profit of group 3 (or group 4 such as the firehouse).

So there is NO WAY we can compare sales made of 60% of group 1 and group 2 in 2004-2005 with sales made of 60 % of group 3 and group 4 in 2011. IT IS NOT THE SAME HOUSE … and unfortunately, group 3 and group 4 is currently selling at loss (either they bought the house for more and are selling at loss, either the ROI on remodeling is negative).

The ONLY valid statistics we can ever consider are resale of SAME house in the SAME condition a few years apart. … which is currently looking pretty bad for 100% of noe valley. (something like -25% for group 1, -10% for group 2, -17% for group 3 and N/A for group 4)
((note that breaking down the same numbers for the past 24 months, I agree 100% with Alex – about no change in value – it dipped hard and fast and now is stable due to a very low inventory / turnaround))

If we take strictly Noe Valley sales .. we CANNOT do any valid stats without taking into account the millions and millions of dollars in infrastructure investment over the past 10 years.
So to make an acceptable index we need to take the total *assessed* (not the city assessor BS of course) value of all the houses – add (factoring inflation) the millions of dollars spent – and compare to the total *assessed* value of all the houses. Considering that many houses have been upgraded by owners occupants who spent according to their taste and not the raw ROI … I’d say that Noe valley is probably the worse off ‘hood in the city. The ‘hood were people overspent the most….
Or maybe it takes second position behind the Marina and its gazillion dollars spent in anchoring 60ft deep octopus under houses.

Vice versa, I believe that sunset (the “cliche” sunset, not a specific submarket) has been holding pretty well considering that people upgraded houses nicely with NORMAL spending such as new stucco, windows, new kitchen appliances etc … items that cost peanuts and make big bucks in a ‘hood that has virtually no group 1…. and has been consistently and slowly been going up… maintaining the desirability thus the property value of the houses. – ie the raw value of a block might decline, but owners spent less thus are loosing much less money.

In any case, the money invested in infrastructure in San Francisco over the past 10 years is outrageously phenomenal …. something that doomed so many cities. (think ghost unoccupied doomed new developments in the central valley – give them 20 years to become bulldozer houses … or in the city, the development on San Jose freeway) … but something that created even more desirability /wealth in San Francisco.

I recently wandered around in HuntersPoint – to the furthest street … and OMG … it’s a nice clean ‘hood!!! I don’t believe there are any more hot/black/not safe street either in the mission or tenderloin etc.
Does ANY index ever factors in the creation of infrastructure such as the T? the infinity? the new caltrain ‘hood? Octavia? That only-in-san-francisco creation of wealth is the only safety net that saved the city from loosing a good 50% across the board in individual houses sales. ((however homeowners LOST money sale or no sale … just add property taxes, sales taxes, cost of living, high gas prices etc. the wealth was not a miracle, it’s only a transfer from somewhere else…))

Anyway … I disagree with Noe picking up. Noe is not bad, Noe is still a safe bet LONG TERM and so is absolutely any and all ‘hood within the city limits – (bad investments are the uber expensive broadway, presidio terrace etc … places that you pay premium for the name of the neighbor … something that has no value in 20 years time).
Short term is just that – short term. And the house value can sneeze up or down as fast as the neighbor changing his house facade color – or worse, the other neighbor’s son dealing drugs. Individual houses in Noe can loose overnight 10% should a building permit on the neighboring house be approved or denied by the city. Overall Noe market is very low and very stable .. with hope, with a virtually bullet proof safety net (something that does not exist in 98% of the US markets) but still no proof it’s picking up. ((for this, there is a need to attract some outsider money. and I don’t currently see it)).
To some extend, it’s the same across the city and across the market within city limits.

Sophie: First of all, wow, that was quite a response, and there is much that I agree with in it. Perhaps most importantly, as I point out in my blog post, the very small number of sales on a month to month basis means that one has to be very careful drawing broad conclusions.

On the other hand, you either believe in statistical measures — with all their limitations and caveats — or you don’t. We can’t do the C-S resale of the same home algorithms because we don’t have enough data points. I choose to use a 3 month moving average of medians because I think it does the best job filtering out the outliers at the top and the bottom end of the market. I’m certainly not saying that one or two months of stellar sales results really means that Noe Valley is back to its pre-crash highs. However, I do think that Noe Valley has had a remarkable rebound over the spring and summer months thus far.

Thanks for your comments. I’d be delighted if you decided to cut and paste them over on to my site as well for my own readers’ benefit.